Streams

The Bitcoin Boom and Bust

Thursday, January 16, 2014

Bitcoin. (Zach Copley/flickr)

Can you explain what a bitcoin is? Our guest can. Ashlee Vance, technology writer for Bloomberg Businessweek, explains the current bitcoin craze: if it's possible to make money, where to spend bitcoins, the companies that have sprung up to service the virtual currency, and why the value fluctuates so wildly.

Guests:

Ashlee Vance

Comments [34]

Mr. Bad from NYC

@ BruceM from Short Hills

So, you are "not a bitcoin expert but I have some experience in financial markets and banking" guy? Pray tell where you've worked so I can avoid such establishment like the plague? You state that someone would owe "income tax" on botcoin arbitrage? Are you for real? Do you know the basic Tax 101 difference between the "income tax" on earned income and "capital gains" on unearned income? How is buying with botcoin like "any foreign currency transaction" when it is not designated as a foreign currency by any government, even those that seek to regulate and integrate it? Nor is it traded in the Foreign Currency market the way any currency would be traded (i.e. as a pair) but instead trades like a commodity?

You also suggest that the wild Botcoin volatility is due to fluctuation of supply and demand as one "possible explanation" as opposed to the far more likely explanation of market manipulation by the NSA, the preeminent mining consortium and originator of Botcoin? Thanks for the two massive paragraphs blocks full of nonsense and outright lies. Great explanation. Go put this funny hat on and sit in the corner.

Jan. 17 2014 03:56 AM
BruceM from Short Hills

Part 2

If the U.S. government were to prohibit transactions in bitcoin by Americans, the price of bitcoin would likely fall as the American demand for bitcoin would be reduced. But the price would not immediately fall to zero because the bitcoin market is international in scope. Canadians, for example, might still be interested in owning and trading in bitcoin. Over time, I personally expect the value of bitcoin to fall to about zero because, in my opinion, it represents a mania, not unlike the Dutch tulip bulb mania centuries ago. But it may take years to play out.

If you are a U.S. citizen, transactions in bitcoin are subject to tax. If you make money trading bitcoins, you would owe income tax, and perhaps self employment tax if you are a bitcoin miner. If you are a merchant accepting bitcoin in exchanges, their value would be included in your revenues in calculating your net profits subject to income tax. In this sense, bitcoin are no different than any other foreign currency in that even though transactions are not in U.S. dollars, they are still subject to tax if you are a U.S. citizen. Of course, the IRS tax collecting effort is largely dependent on the honesty of the citizens self reporting their income on their tax returns. But all returns are subject to the possibility of audit.

I hope these answers are helpful.

Best wishes and beware!

Jan. 16 2014 07:39 PM
BruceM from Short Hills

Hi,

I am not a bitcoin expert but I have some experience in financial markets and banking. I will try to answer Bob_Weiss’s questions.

The current value (or price) of a bitcoin is determined by “supply and demand” as expressed in the market. One group of market participants are willing to sell bitcoins at a variety of different prices – representing supply. Another group of market participants are willing to buy bitcoins at a variety of different prices – representing demand. Where buyers in the market are willing to pay as much or more than prices demanded by sellers, trades will occur. What you will be left with after all of the easy trades occur is a market price somewhere between the buyer’s highest “bid” and the seller’s lowest “ask”. If the market has many participants and lots of liquidity, the spread (difference) between the bid and the ask will be quite small and you will have a very good indication of the current price.

One of the possible explanations for large fluctuations in the value of bitcoin would be that there are not a lot of participants in the market that have strong convictions about the value of a bitcoin. This condition would cause the market to be inefficient and illiquid and more subject to shock when compared to a market with more participants and more informational transparency. A specific incident in the bitcoin market occurred on around December 18th when the Chinese government plaed restrictions on bitcoin transactions. This had the effect of reducing demand for bitcoin (it is a global market_) and the price fell – supply and demand at work.

Purchasing items from a vendor with bitcoin instead of dollars is just like any foreign currency transaction. In you example, the vendor may have expected to be able to trade the two bitcoins for $2,000 but when he gets around to it he discovered that he could only get $1,200. Unless you had a further agreement, the vendor would take the loss. This is the same situation that is faced by importers and exporters, in the case of a U.S. importer purchasing from a European exporter, the two parties need to agree on the currency of payment. One of the parties is going to experience currency risk, just as does your hypothetical vendor.

End of Part 1

Jan. 16 2014 07:38 PM
Mr. Bad from NYC

@ whynotnot

The great thing is that Bitcoin will kill itself off eventually after having performed its function. There is a limit of 21 million Bitcoins built into the program and as time goes on the Botcoins (as I like to call them) become more and more expensive to mine (electricity/computing power)and you get fewer and fewer until no more can be created. Botcoins are divisible to 8 decimal points but when all botcoins are mined why would anyone spend the massive amount of power necessary to hash (compute) the transactions? Botcoiners say for "fees and stuff" miners will do that but why transact in a currency which is advertised as having zero to no fees for transactions and is built to be free? So then, fees on transactions that cannot be hashed? When people start to "hold" Botcoins in a digital wallet the Botcoins cannot be transacted. Poof.

Also, if need be a certain group with access to a truly massive amount of computer "mining" power *cough* like for instance the NSA's massive Utah data center, can destroy Botcoin completely or control what, when and how Botcoin transactions take place, if at all.

http://www.technologyreview.com/view/521521/bitcoin-vulnerability-could-allow-malicious-miners-to-seize-control/

It's the most brilliantly executed NSA op in the agencies history. it paves the way for a US gubment backed digital currency to "take over" after the collapse of Botcoin and offer the security, safeguards and potential to completely annihilate personal privacy and liberty that our friends at the NSA crave. A++

Remember how fast e-gold died? I'm not a gold bug (anti-gold akshully) but e-gold was right about one thing, the government doesn't own a Philosopher's stone. They couldn't control a currency back by gold because they can't make gold out of thin air and so e-gold was annihilated with extreme prejudice. Outlawed as a legit threat. But the government is very "open" to Botcoin, with some regulation of course, ROFL...

Jan. 16 2014 06:37 PM
Nick from UWS

This is the Emperor's new clothes, and you all know and I know that nobody understands what this is all about or how it works, and it strikes me as purely the mental masturbation of some computer scientists. Until someone explains to me exactly how I can use this to buy a quart of milk, I'll leave this to people who enjoy making their lives infinitely more complicated.

Jan. 16 2014 05:19 PM

The interview did not clarify a few basic questions:

What determines the current value of a bitcoin?

What are some of the reasons for a bitcoin drastically changing value in a short period of time?

Suppose I buy items worth $2,000 from a vendor accepting the currency and pay the vendor with 2 bitcoins on a day when current value per coin is $1,000. When the vendor converts my coins to cash the value has suddenly fallen to $600. Does the vendor take a loss?

If the US government decides to close down bitcoin transactions, does the value of a bitcoin fall to zero?

Does any goverment (US federal, State, etc.) collect any tax on bitcoin transactions?

Jan. 16 2014 03:19 PM

@Mr. Bad from NYC

You have a suspicious mind. I had not thought about it that way, it does sound like something I would have done if I were an NSAer.
I guess the old adage is even truer now:
Cash is King

Jan. 16 2014 02:34 PM
Mr. Bad from NYC

@ whynotnot

Yes, the NSA is "VERY serious about this". It's key to their whole domestic intelligence strategy and they are following the same marketing plan as with the social media wave. Get the kids involved first, the rest will follow.

You sell social media with sex, drugs and rock and roll stories (ya' know, cultural zeitgeist stuff, LOL) and you sell Bitcoin with FREE MONEY. Of course, none of it is true. A bitcoin mining rig is an extremely poor investment, you can't just do it with a consumer PC, even Litecoin (Bitcoin alternative that requires less computing power to mine) requires a very high end GPU (not integrated graphics as in most consumer PC's).

But if you can't mine you can own, right? So the NSA is creating massive volatilit in the price. For those of you who aren't credulous or greedy the key to trading anything successfully is volatility. If it doesn't change in value you can't make any money. So the NSA, deep thinkers that they are, are manipulating the Bitcoin market to get the attention of the average schmuck and unemployed kids living with their parents who need beer money. Buy a bitcoin and wait, you'll get rich! ADOPTION RATES soar! Pretty soon it's hip to have a chip! Right, daddy o? The olds get on board and it just seems like the next logical step to have a USD version of digital currency backed by uncle sam. You already use you card for most transactions, right? Well now that's all there is ! Just cards, no cash, and virtual wallets replace bank acconts so they are easily traced and monitored just like this NSA paper, published in 1996, lays out on page 1148 under the heading "Summary of proposed Implementation":

http://digitalcommons.wcl.american.edu/do/search/?q=author_lname%3A%22Law%22%20author_fname%3A%22Laurie%22&start=0&context=973062

(copy and paste the link into your browser)

They even propose the same technique Bitcoin uses to ensure traceability, namely the digital wallet! Classic!

Jan. 16 2014 02:08 PM

@Mr. Bad from NYC

FWIW I have using this name for a while, why no other comments are shown in my profile is a mystery to me.
If I gave you a thumbs down it was a miss press, I will give you 2 ups to cancel that out;)

And none of my comments were "joke" comments.

Jan. 16 2014 01:59 PM

This is an interesting article on mining, scoff if you want but some people are VERY serious about this.

http://nybw.businessweek.com/articles/2014-01-09/bitcoin-mining-chips-gear-computing-groups-competition-heats-up

Jan. 16 2014 01:09 PM
Mr. Bad from NYC

@ whynotnot

Hello, NSA :)

If you want to bump my comment down you should probably use an account that you didn't just create for that express purpose, i.e. you only have two posts under this "just created" handle "whynotnot" both joke comments on this thread. just sayin. And for those who still don't understand what Bitcoin is consult this NSA paper, written in 1996, which will explain exactly what Bitcoin is and discusses all of the relevant issues:

http://digitalcommons.wcl.american.edu/do/search/?q=author_lname%3A%22Law%22%20author_fname%3A%22Laurie%22&start=0&context=973062

(copy and paste the link into your browser)

Jan. 16 2014 12:50 PM

Along with not giving a succinct explanation of what bitcoin is - an Internet-created store of value that some merchants will accept in return for goods and services, there is a fearful development for the use of bitcoin. Hiring a hitman! And even worse, setting up capital accumulation sites to 'buy' a hit. Imagine a kickstarter campaign that will pay $100M (in bitcoin) to knock of Kim Jung Un and you get the picture. Now that is scary.

Jan. 16 2014 12:46 PM

Mmm just a thought, can I put some in my Roth???

Jan. 16 2014 12:43 PM

@RUCB_Alum
I'll buy them for that price, even giv yu a 5% premium.

PS price seems to be $850ish.

I have read about bitcoins several times and still have a rough time getting the concepts straight. I am thinking of setting up a wallet just cuz...

Jan. 16 2014 12:42 PM
Mr. Bad from NYC

Way back in the day the NSA was thinking hard about bitcoin apparently...

http://digitalcommons.wcl.american.edu/do/search/?q=author_lname%3A%22Law%22%20author_fname%3A%22Laurie%22&start=0&context=973062

(copy and paste the link into your browser)

P.S.

Laurie Law, Susan Sabett and Jerry Solinas work for the NSA, you can google it.

Jan. 16 2014 12:39 PM

@jgarbuz from Queens

"And you criticize Wall Street, eh?"

Not so fast with the judgments, jgarbuz. You'll get whiplash. Putting $40 into Bitcoins was pure speculation on my part. Money I could easily (and afford to) lose. I knew that up front.

Wall Street pretends that prudent investment will preserve your capital which the meltdown, Madoff, Steven Cohen and others have shown is a vicious lie. The least risky place for you money is Treasuries and Treasuries do not match CPI so the best the least risky investment does is help you go broke more slowly.

I know the difference between speculating and investing and don't need you to try and school me.

When I'm being hypocritical, I have people whose opinion I care about who will tell me.

(though I will admit it was nice to hear that I'm back up to $500!)

Jan. 16 2014 12:39 PM
BruceM from Short Hills

Another tweeter beat me to the point that in the absence of anything else (e.g. no gold standard) the U.S. Dollar is backed up by the requirement that Americans pay their taxes to the IRS in U.S. Dollars. Americans will always need dollars as long as there are taxes.
By contrast, no reliable authority demands payment in bitcoin. Yes, some businesses accept them as a novelty but most of those businesses also accept traditional money and they always have the choice to stop accepting bitcoin should there be a future bitcoin crash (as I predict).
Notwithstanding the its digital origin, bitcoin closely parallel the Dutch tulip mania. Note that the Dutch government was probably not foolish enough to accept tulip bulbs as tax payments.
Congress and the President could do Americans no bigger favor (with respect to bitcoin) than to make the sale or exchange of bitcoin illegal for American citizens. That should suppress bitcoin demand and perhaps kill the monster before it becomes "too big to fail."
But, in the spirit of liberty, let anyone buy all the bitcoin they want and smoke them or give them away, just don't try to sell them to a bigger fool.
My final thought is to express incredulity that the New York Times, Wall Street Journal, and Chairman Bernanke choose to give bitcoin serious consideration as something other than a bubble, but who knows, "this time it's different."
All the best to you.

Jan. 16 2014 12:34 PM
Mr. Bad from NYC

All you need to know about bitcoin is that it is the honeypot to end all honeypots. Just like the Intertubes where everything was once supposed to be so anonymous (until Snowden revelations), TOR (dreamed up and implemented by ONI/DOD) and now Bitcoin.

Bitcoin: Responsible for aggregating the online black market for massive drug transactions and numerous other far more ugly illicit products and services into one easily monitored place. Perfect for LE. They only busted Silk Road when they'd milked it for every last drop of intel, humint and signal.

Bitcoin is the forerunner of a national digital currency which will allow perfect and complete government monitoring of all financial transactions. It's already started, go try and get a "check" from the gubment... most services require that you have accept a Direct Deposit to a bank acct.

Sounds crazy right? Well, you heard it here first. All those people who said I was crazy years ago to think the gubment was watching their facefooks sure are quiet about that now when I bring it up...

Jan. 16 2014 12:30 PM
jgarbuz from Queens

Mr. Bad

I don't hate Wall Street. I don't play with stocks since I lost a small bundle 40 years ago. I don't believe that Wall Street should be regulated either. It's a casino and if you want to lose some money, go play. The only financial regulation I support is FDIC where the gov't "guarantees" your bank deposits up to a certain amount. That's about as safe as it is going to get. I don't believe financial regulations are going to stop gamblers from speculating, be it on Wall STreet, or in Los Vegas, or in Bitcoins, or on tulips. There is no such thing as perfect safety. And the government is not perfectly safe either.

Jan. 16 2014 12:04 PM

How about getting an economist to talk about this?

Jan. 16 2014 12:00 PM
Nick from UWS

"Can you explain what a bitcoin is? Our guest can." This guest has not spent even one second explaining what a bitcoin.

Jan. 16 2014 11:57 AM
Mr. Bad from NYC

@ jgarbuz from Queens

Nobody hates Wall Street because they "speculate". Maybe you do, I dunno. People hate Wall Street because the financialization of our economy has led to the breakdown of government regulation (namely Glass-Steagall), the privatization of profits and socialization of losses. Your consistent and startling ignorance of basic economic issues is, as always, breathtaking.

As for Bitcoin it's a government dream come true. The end of cash transactions and all dreamed up by "Satoshi". One man, apparently. Not an NSA scheme at all. Nothing to see. Move on.

Jan. 16 2014 11:57 AM
Henry from Katonah

Paul Krugman , as usual when it comes to economic issues , has had a few interesting observations about bitcoin. He compares it to gold, in that it is not controlled by a government.

Jan. 16 2014 11:56 AM
fuva from harlemworld

This seems like stupidiTY to me. But it is nevertheless telling about the zeitgeist and therefore worthy of ten minutes of reporting (and head shaking).

Jan. 16 2014 11:55 AM
jgarbuz from Queens

All "money" is based on faith, even gold. Faith that others will accept it in exchange for really useful stuff like food. Faith in the government, or faith that others will accept your shiny metal. Or whatever. Trade started with pure barter. Then the concept of "money" was created where people accept something intrinsically worthless in exchange for real things. Without faith, there is no such thing as money.

Jan. 16 2014 11:54 AM

There are indeed a few people online who have written clear and precise copy as to what is a Bitcoin and why it may matter. This "reporter" is not one of them.

And Brian is doing himself no favors by opening the segment with talk about "mining" BitCoins, which has really no relevance to the overall picture. #FAIL

Jan. 16 2014 11:53 AM
Andrea from NYC

Um. Beanie Babies anyone?

Jan. 16 2014 11:52 AM
Dave from UWS

I don't get it. What is the VALUE of solving whatever mathematical problem a bank of computers solves to earn a bitcoin?

Jan. 16 2014 11:51 AM
Marcy Arlin from Brooklyb

Please please explain exactly what is a bitcoin? Isit backed up by real money or is it virtual, like futures?

Jan. 16 2014 11:49 AM
Nick from UWS

"Mining bitcoins"? "Solving the puzzle"? What the HELL are you people talking about...this segment is just about as clear as mud. Very few people understand what the hell you people are talking about, or what a bitcoin even is.

Jan. 16 2014 11:49 AM
jgarbuz from Queens

TO RUCB_ALUM

And you criticize Wall Street, eh? But you "whoo hoo" when you get a luck windfall and suddenly make money from pure speculation. Liberal hypocrite.

Jan. 16 2014 11:39 AM
jgarbuz from Queens

Gambling is an ancient human instinct that gives some people the false hope that their gods or spirits or "lady luck" will somehow come to their aid and give them the magic edge. And money is anything that a group of people choose to accept as a medium of exchange. It could be beads, wampum, shiny metal coins, or green pieces of paper. It all comes down to what we choose to believe.

Jan. 16 2014 11:33 AM

My best investment of 2013!

Bought half a coin early in the year for $40. Watched with glee as it rose to $500+. The value is now back down to $300 but I'm still playing with 'house money'! Woo-hoo!

Jan. 16 2014 11:27 AM
Peter from North Carolina

Online poker is treated as illegal in most states right now. The Department of Justice has blocked most of the real money poker sites to American players. I have heard that some American poker players are getting around this ban by playing online poker on sites which use bitcoin, not money, as currency. Any thoughts on this?

Jan. 16 2014 09:14 AM

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